2 measurement of potential output
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2. Measurement of Potential Output. Alternative definitions of PO (vgl. SVR, JG 2007/08, TZ 693). real GDP at full use of capacities. real GDP at normal use of capacities. normal use of capacities => calculated from trend in recent cycles. normal use of capacites

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2. Measurement of Potential Output

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2 measurement of potential output

2. Measurement of Potential Output

Alternative definitionsof PO

(vgl. SVR, JG 2007/08, TZ 693)

real GDP atfulluseofcapacities

real GDP atnormaluseofcapacities

normal useofcapacities => calculatedfromtrend in recentcycles

normal useofcapacites

=> definedas non-inflationary

U. van Suntum, KuB

1

U van Suntum, Vorlesung KuB 1


2 measurement of potential output

Capacityutilization (Auslastungsgrad) CU = GDP/PO

Output-gap (Outputlücke): OG = (GDP – PO)/PO

U. van Suntum, KuB

2

U van Suntum, Vorlesung KuB 2


Measurement of potential output

Measurement of Potential Output

  • Long term:

  • (allowingforinvestments in both

  • human and real capitalandfor

  • technicalprogress)

  • productionfunctionapproaches

  • (Okun, Bundesbank, OECD, SVR)

  • Short term:

  • (atconstantlevelandqualityof

  • factorsofproduction)

  • statistical filter-approaches

  • (Hodrick/Prescott 1997,

  • Baxter/King 1999 u.a.)

U. van Suntum, KuB

3

U van Suntum, Vorlesung KuB 3


2 measurement of potential output

U. van Suntum, KuB

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U van Suntum, Vorlesung KuB 4


2 measurement of potential output

U. van Suntum, KuB

5

U van Suntum, Vorlesung KuB 5


2 measurement of potential output

  • Potential Output by Okuns`s Law (A.M. Okun, 1962)

  • Based on empiricalobservations in USA 1947 - 1960

  • Decline in unemployment rate RU by 1% => increaseof GDP by 3%

  • Natural rate ofunemployment (NRU) = 4%

  • Critique (i): todaycapitalisthemorescarcefactor

  • Critique (ii): ruleofthumb, dependent on time andregion

U. van Suntum, KuB

6

U van Suntum, Vorlesung KuB 6


2 measurement of potential output

2. Potential Output by Peak-to Peak (L. Klein 1964)

PO

„Peaks“

GDPreal

Zeit

  • Critique (i): trendmay not bestable

  • Critique (ii): not everypeakimpliesfullcapacityutilization

  • Critique (iii): trendof GDP ortrendof GDP-growth?

U. van Suntum, KuB

7

U van Suntum, Vorlesung KuB 7


2 measurement of potential output

PO by peak to peak

BIP real

U. van Suntum, KuB

8

U van Suntum, Vorlesung KuB 8


2 measurement of potential output

3. Potential Output by shifting the trend

Maximum tangent point

trend

PO

GDPreal

  • Critique (i): trendmaybeunstable

  • Critique (ii): trendof GDP ortrendof GDP growth?

U. van Suntum, KuB

9

U van Suntum, Vorlesung KuB 9


2 measurement of potential output

4. Potential Output by production function

(Bundesbank, OECD)

  • Critique (i): capital stock andNpotmust beestimated

  • Critique (ii): Cobb-Douglas productionfunctionappropriate?

U. van Suntum, KuB

10

U van Suntum, Vorlesung KuB 10


2 measurement of potential output

5. Potential Output by non-parametric estimation

(Bundesbank)

Trend estimation

wage share

  • mainadvantage: absolute valuesof K und Npotneed not beknown

  • Critique (i): absolute valueof PO cannotbedirectlycalculated

U. van Suntum, KuB

11

U van Suntum, Vorlesung KuB 11


2 measurement of potential output

Exercise (I): Calculate PO by Okun´s law for quarter 7

U. van Suntum, KuB

U van Suntum, Vorlesung KuB 12


2 measurement of potential output

Exercise (II): Calculate PO by peak to peak for quarter 14

U. van Suntum, KuB

U van Suntum, Vorlesung KuB 13


2 measurement of potential output

Exercise (III): Calculate PO by trend shifting for quarter 14

U. van Suntum, KuB

U van Suntum, Vorlesung KuB 14


2 measurement of potential output

Exercise (IV): Calculate PO by Cobb Douglas production function for quarter14

Assume:

U. van Suntum, KuB

U van Suntum, Vorlesung KuB 15


Learning goals questions

Learning goals / Questions

  • Which definitions of Potential Output do we know?

  • How are potential output, capacity utilization, and output gap related to each other?

  • How can we estimate/calculate Potential Output?

  • What are the main strengths and weaknesses of the various approaches?

U. van Suntum, KuB

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U van Suntum, Vorlesung KuB 16


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